OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LTD

Transcription

1 OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LTD ANNUAL FINANCIAL STATEMENTS 31 DECEMBER

2 Contacts Public officer Auditors J Baepi KPMG Inc. Chartered Accountants (SA) Registered Auditors 1 Mediterranean Street Foreshore Cape Town 8001 South Africa Postal address PO Box 66 Cape Town 8000 South Africa Registered office Company secretary Mutualpark Jan Smuts Drive Pinelands 7405 South Africa E M Kirsten Company registration number 1999/004643/06 Preparation supervised by K Murray CA Finance Director These financial statements have been audited in compliance with the applicable requirements of the Companies Act. 1

3 Index The reports and statements set out below comprise the company's annual financial statements: Index Page Statement of directors' responsibilities 3 Certificate by the Company Secretary 3 Directors' report 4 Statutory actuary's report 7 Audit, Risk and Compliance Committee report 8 Independent auditor's report 9 Income statement 10 Statement of comprehensive income 11 Statement of financial position 12 Statement of changes in equity 13 Statement of cash flows 14 Accounting policies Employment equity report 91 The company's consolidated financial statements are contained in a separate document. 2

4 Statement of directors' responsibilities Directors responsibility statement The directors are responsible for the preparation and fair presentation of the annual financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, comprising the statement of financial position at 31 December and the income statement, statements of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa and the directors report. The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and for maintaining adequate accounting records and an effective system of risk management. The directors have made an assessment of the ability of the company to continue as a going concern and have no reason to believe that the business will not be a going concern in the year ahead. The auditor is responsible for reporting on whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. Approval of annual financial statements The annual financial statements of Old Mutual Life Assurance Company (South Africa) Limited, as identified in the first paragraph, were approved by the board of directors on 19 February 2015 and signed by: P G de Beyer Chairman B M Rapiya Chief Executive Officer Certificate by the Company Secretary I declare that, to the best of my knowledge, the company has lodged all such returns and notices as are required of it in terms section 88(2)(e) of the Companies Act of South Africa 71 of 2008, for the year ended 31 December and that all such returns are true, correct and up to date. E M Kirsten Company Secretary 19 February

5 Directors' report The directors of Old Mutual Life Assurance Company (South Africa) Ltd have pleasure in submitting their report on the company's annual financial statements for the year ended 31 December. 1. Review of activities The principal activity of the company is the transaction of all classes of life assurance, savings and retirement funding business. The company underwrites life insurance risks associated with death and disability. It also issues a diversified portfolio of investment contracts to provide its customers with asset management solutions for their savings and retirement needs. The operating results and financial position of the company are set out in the income statement, statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows and accompanying notes. Profit before tax was R million (: R million), and R million (: R million) after tax. 2. Consolidated annual financial statements In terms of International Financial Reporting Standards ("IFRS"), the company is required to produce consolidated financial statements as its subordinated debt instrument is traded in a public market. Consolidated financial statements prepared and presented in accordance with IFRS are expected to be issued in April In these company-only financial statements the company's investments in its subsidiaries, joint ventures and associate companies are accounted for as financial assets at fair value through profit or loss and dividends are recognised when receivable. Details of the company's interest in its principal subsidiaries, joint ventures and associates are set out in note Holding company The company's holding company is Old Mutual Emerging Markets Ltd incorporated in South Africa. 4. Ultimate holding company The company's ultimate holding company is Old Mutual plc incorporated in the United Kingdom and listed on the London, Johannesburg, Malawi, Namibia and Zimbabwe stock exchanges. 5. Share capital There were no changes in the authorised or issued ordinary or preference share capital of the company. 6. Dividends Ordinary shares Dividends on ordinary shares amounting to R million (: R million) were declared during the year. The total includes dividends in specie of R million. Preference shares Dividends on preference shares amounting to R 693 million (: R million) were declared during the year. 7. Public interest score The company's public interest score, as determined in accordance with the relevant provisions of the Companies Act, 71 of 2008, is

6 Directors' report 8. Directors The directors of the company during the year were as follows: Name Nationality Changes P G de Beyer South African N T Moholi South African Appointed 17 February C W N Molope South African R T Mupita South African K Murray British B M Rapiya South African P G M Truyens Dutch G S van Niekerk South African Resigned 17 February The directors currently holding office are: Executive directors R T Mupita K Murray f B M Rapiya (Chief Executive Officer) Independent directors P G de Beyer ca C W N Molope ar P G M Truyens ar, ca N T Moholi ar, ca* ar Member of the Audit, Risk and Compliance Committee ca Member of the Customer Affairs Committee f Member of the Financial Assistance Committee In terms of the memorandum of incorporation, Mr P G de Beyer, Ms C W N Molope and Mr R T Mupita are due to retire at the annual general meeting. Ms N T Moholi, having been appointed during the year, is also due to retire at the annual general meeting. All remaining directors have indicated that they would seek re-election at the annual general meeting, and all being eligible, and having been recommended for re-election by the board of directors, offer themselves for re-election. 9. Company secretary Ms E M Kirsten is the company secretary. Registered office Postal address Mutualpark Jan Smuts Drive Pinelands 7405 South Africa PO Box 66 Cape Town Auditors KPMG Inc. will continue in office in accordance with section 90 of the Companies Act. 5

7 Directors' report 11. Events after the end of financial year On 12 January 2015 the company agreed to dispose of the remaining portion of the Menlyn Shopping Centre in South Africa for R3 200 million, subsequent to the completion of agreed upon improvements on the centre. Refer to note 13 for more information. On 23 January 2015 the company purchased a 23.3% stake in UAP Holdings Ltd, an East and Central African financial services company, for a total consideration of R1 139 million (KES 8.88 billion). On 26 January Old Mutual Holdings Ltd, a fellow subsidiary based in Kenya, confirmed that it will be acquiring an additional 37.3% of UAP's shareholding, subject to regulatory approval. Following the successful completion of a bond auction, which took place on 16 March 2015, the company has issued a mixture of floating rate and fixed instruments with several maturities through its existing local South African programme. Accordingly, the JSE Limited has granted a listing to the company on the South African Interest Rate Market with effect from 19 March 2015 under its Unsecured Subordinated Callable Note Programme dated 4 September. The total nominal value of instruments issued was R2 061 million. 12. Going concern The Board has satisfied itself that the company has adequate resources to continue in operation for the foreseeable future. The company's financial statements have accordingly been prepared on a going concern basis. 13. Corporate citizenship and non-financial reporting The Old Mutual Group publishes a separate responsible business report which covers operational activities of its business with respect to its material sustainability issues. 6

8 Statutory actuary's report I have conducted an actuarial review of the company as at 31 December, according to applicable guidelines issued by the Actuarial Society of South Africa. Contracts classified as insurance and investment contracts with discretionary participation features have been valued using the Financial Soundness Valuation (FSV) method. Contracts classified as investment contracts (without discretionary participation in profit) have been valued at fair value as per IFRS 9, Financial Instruments. Policyholders reasonable benefit expectations have been taken into account in valuing policy liabilities. Further notes to this report, including a description of the valuation basis, are provided in notes 41 and 44 to the annual financial statements. Sample derivative contract prices derived from the calculation of market-consistent investment guarantee reserves are provided in note 40. Actuarial balance sheet Published Statutory Published Statutory Total value of assets Actuarial value of policy liabilities ( ) ( ) ( ) ( ) Unsecured subordinated callable notes (3 996) (3 996) (3 000) (3 000) Provisions and other liabilities (40 360) (40 289) (40 928) (40 834) ( ) ( ) ( ) ( ) Excess of assets over liabilities Less: Inadmissible for statutory solvency purposes (495) (475) Less: Limits on group undertakings (7 601) (1 012) Add: Unsecured subordinated callable notes Excess assets (statutory basis) Statutory capital adequacy requirement (CAR) Ratio of excess assets to CAR Notes: 1 Certain of the figures for inadmissible assets and limits in respect of group undertakings and the resulting calculations are estimates. 2 A reconciliation of the movement in excess of assets over liabilities on the published basis is provided in note The composition of the assets backing the CAR is 12.5% in local equities and 87.5% in local cash (: 12.5% local equities and 87.5% local cash). Certification of statutory financial position I hereby certify that: the valuation on the statutory basis of the company as at 31 December, the results of which are summarised above, has been conducted in accordance with, and this statutory actuary's report has been produced in accordance with, applicable Actuarial Society of South Africa professional guidance notes and Board Notice 14 of 2010; the company was financially sound on the statutory basis as at the valuation date, and in my opinion is likely to remain financially sound on the statutory basis for the foreseeable future; and the company also had sufficient non-linked assets to more than cover non-linked liabilities and capital adequacy requirements after allowing for the asset spreading requirements as prescribed by the Long Term Insurance Act. G W Voss Statutory Actuary BSc, FIA, FASSA Cape Town 19 February

9 Audit, Risk and Compliance Committee report The Audit, Risk and Compliance Committee is a committee of the board of directors, and serves in an advisory capacity to the Board in discharging its duties relating to the safeguarding of assets, the operation of adequate systems, risk management and internal controls, the review of financial information and the preparation of the annual financial statements. This includes satisfying the Board that adequate internal, operating and financial controls are in place. Terms of reference The Audit, Risk and Compliance Committee has adopted formal terms of reference that have been updated and approved by the board of directors, and has executed its duties during the past financial year in compliance with these terms of reference. Composition and meeting process The current members are Ms C W N Molope (Chairman), Mr P G M Truyens and Ms N T Moholi. The committee comprises exclusively independent directors, and met five times during the year with senior management, including the chief executive officer, the statutory actuary, the finance director, the group audit director, the chief risk officer and certain other executive management. Representatives from Old Mutual plc also sometimes attend. The external and internal auditors attend these meetings and have unrestricted access to the committee and to its chairman. Ad hoc meetings are held as required. Statutory duties In execution of its statutory duties, as required in terms of the Companies Act and the Insurance Laws Amendment Act, during the past financial year the Audit, Risk and Compliance Committee has: Ensured the appointment as external auditor of the company of a registered auditor who, in the opinion of the Audit, Risk and Compliance Committee, was independent of the company. Determined the fees to be paid to the external auditor and such auditor s terms of engagement. Ensured that the appointment of the external auditor complies with the Companies Act and any other legislation relating to the appointment of such auditors. Determined the nature and extent of any non-audit services which the auditor may provide to the company or such services that the auditor may not provide to the company or related company. Pre-approved any proposed contract with the auditor for the provision of non-audit services to the company. Considered the independence of the external auditors and has concluded that the external auditor has been independent of the company throughout the year taking into account all other non-audit services performed and circumstances known to the committee. Received and dealt appropriately with any complaints relating to the accounting practices and internal audit of the company, the content or auditing of its annual financial statements, the internal financial controls of the company, or to any related matter. Made submissions to the Board on any matter concerning the company s accounting policies, financial control, records and reporting. Legal requirements The Audit, Risk and Compliance Committee has complied with all applicable legal, regulatory and other responsibilities for the period under review. Annual financial statements Following our review of the annual financial statements for the year ended 31 December, we are of the opinion that, in all material respects, they comply with the relevant provisions of IFRS and the Companies Act 71 of 2008 and that they fairly present the financial position at 31 December of the company and the results of operations and cash flows for the year then ended. C W N Molope Chairman of the Audit, Risk and Compliance Committee 19 February

10 Independant auditor's report To the shareholders of Old Mutual Life Assurance Company (South Africa) Limited We have audited the financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, which comprise the statement of financial position at 31 December, and the income statement and the statements of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, as set out on pages 10 to 88. Directors' Responsibility for the Financial Statements The company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements present fairly, in all material respects, the financial position of Old Mutual Life Assurance Company (South Africa) Ltd at 31 December, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. Other reports required by the Companies Act As part of our audit of the financial statements for the year ended 31 December, we have read the Directors' Report, the Audit, Risk and Compliance Committee's Report and the Company Secretary's Certificate for the purpose of identifying whether there are material inconsistencies between these reports and the audited financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited financial statements. However, we have not audited these reports and accordingly do not express an opinion on these reports. KPMG Inc. Registered Auditor Per: G Dixon Chartered Accountant (SA) Registered Auditor Director 30 March Mediterranean Street Foreshore Cape Town

11 Income statement Notes Revenue Gross earned premiums Outward reinsurance premiums 16 (998) (900) Net earned premiums Investment income (net of investment losses) Fee and commission income Other income Total revenue Expenses Claims and benefits (54 622) (61 280) Reinsurance recoveries Net claims incurred (including change in insurance contract provisions) (54 151) (60 228) Change in investment contract liabilities (19 957) (26 744) Finance costs 7 (902) (974) Commission and other acquisition costs 8 (3 480) (3 171) Operating and administration expenses 9 &10 (8 700) (9 260) Total expenses (87 190) ( ) Profit before tax Income tax expense 11 (2 994) (3 965) Profit after tax for the financial year

12 Statement of comprehensive income Profit after tax for the financial year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Property revaluation Policyholder property revaluation (shadow accounting) (82) (107) Actuarial gains on defined benefit plans and return on plan assets Item that will be reclassified subsequently to profit or loss Currency translation differences 4 60 Other comprehensive income for the year net of taxation Total comprehensive income

13 Statement of financial position Notes Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Post employment benefits Deferred acquisition costs Loans and advances Investments and securities Derivative assets Amounts due by group companies Other assets Cash and cash equivalents Non-current assets held for sale Total assets Liabilities Insurance contracts Investment contracts Borrowed funds Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Total liabilities Net assets Shareholders' equity Share capital and premium Other reserves Share-based payment reserve Retained earnings Total equity

14 Statement of changes in equity Share capital Share premium Other reserves Share-based payment reserve Total reserves Retained earnings Total equity Balance at 1 January Profit after tax Other comprehensive income Issue of share capital Dividends (27 151) (27 151) Total changes (22 410) (22 156) Balance at 31 December Profit after tax Other comprehensive income Dividends (3 510) (3 510) Other movements (48) (48) Total changes Balance at 31 December

15 Statement of cash flows Notes Cash flows from operating activities Cash used in operations 34 (8 397) (4 456) Interest received Dividends received Finance costs (902) (974) Tax paid 35 (2 127) (2 291) Net cash from operating activities Cash flows from investing activities Acquisition of property and equipment 14 (216) (166) Proceeds from disposal of property and equipment Acquisition of investment property 13 (536) (460) Proceeds from disposal of investment property Acquisition of intangible assets 12 (48) (198) Disposal of other intangible assets Net acquisition of financial instruments (3 603) (15 902) Net cash utilised in investing activities (1 943) (7 932) Cash flows from financing activities Issue of subordinated debt Dividends paid to company's shareholders 36 (3 510) (3 878) Net cash utilised by financing activities (2 510) (3 878) Net increase / (decrease) in cash and cash equivalents (1 237) Cash and cash equivalents at the beginning of the year Total cash and cash equivalents at end of the year

16 Accounting policies 1. Statement of compliance The company's annual financial statements have been prepared in accordance with International Financial Reporting Standards, and the Companies Act of South Africa. 1.1 Basis of preparation The financial statements provide information about the financial position, results of operations and changes in the financial position of the company. They have been prepared under historical cost convention, as modified by the accounting policies below. Except as described below, the accounting policies have been consistently applied to all periods presented. The company's consolidated financial statements are presented separately from these company-only financial statements. The financial statements are presented in South African Rands. The financial statements have been amended to reflect the introduction of Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities, which are mandatory for accounting periods commencing on or after 1 January. IAS 32 Offsetting Financial Assets and Financial Liabilities Financial assets and financial liabilities are offset and a net amount is presented in the statement of financial position, only if both of the following conditions are met: The entity currently has a legally enforceable right to set off the recognised amounts - i.e. a legal right to settle or eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor; and The entity has the intention to settle on a net basis; or realise the asset and settle the liability simultaneously (IAS 32.42, 45). The amendments to IAS 32 address inconsistencies that the IASB has identified in the application of some of the offsetting criteria by providing additional application guidance (IAS 32.BC78). The amendments clarify that an entity currently has a legally enforceable right to set off if the right is: - not contingent on a future event; and - enforceable both in the normal course of business, and in the event of default, insolvency or bankruptcy of the entity and all of the counterparties (IAS 32.AG38B). The amendments apply retrospectively for annual periods beginning on or after 1 January. The adoption of these amendments did not have an effect on the financial statements. 15

17 Accounting policies 1.2 Revenue Revenue comprises premium income from insurance contracts (net of outward reinsurance premiums) and investment contracts with discretionary participating features, fee income from investment management service contracts, commission income and investment income (excluding investment losses). Revenue is accounted for in accordance with the following accounting policies. Premiums on insurance contracts and investment contracts with a discretionary participating feature Premiums receivable under insurance contracts and investment contracts with a discretionary participating feature are stated gross of commission, and exclude taxes and levies. Premiums are recognised when due for payment. Outward reinsurance premiums are recognised when due for payment. Revenue on investment management service contracts Fees charged for investment management services provided in conjunction with an investment contract are recognised as income in the income statement as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over periods between 5 and 10 years. Commission income Commission income is accounted for on an earned basis. 1.3 Insurance and investment contracts Classification of contracts Insurance contracts Contracts under which the company accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder, or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder, are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. If significant additional benefits would be payable in scenarios that have commercial substance, significant insurance risk exists even if the insured event is extremely unlikely or even if the expected present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Contracts with a discretionary participating feature Contracts with a discretionary participating feature are those under which the policyholder holds a contractual right to receive additional payments as a supplement to guaranteed minimum payments. Those contracts that have insurance risk are classified as insurance contracts. Those that do not have insurance risk are classified as investment contracts. Investment contracts Contracts under which the transfer of insurance risk to the company from the policyholder is not significant, are classified as investment contracts. 16

18 Accounting policies 1.3 Insurance and investment contracts (continued) Claims paid on contracts Claims and benefits incurred in respect of insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders, death and disability payments and are recognised in the income statement. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim. Amounts paid under investment contracts other than those with a discretionary participating feature are recorded as deductions from investment contract liabilities. Insurance contract and investment contracts with a discretionary participating feature Insurance contract liabilities and liabilities for investment contracts with a discretionary participating feature are measured using the Financial Soundness Valuation (FSV) method as set out in the guidelines issued by the Actuarial Society of South Africa in Professional Guidance Note (SAP) 104 (version 7). Under this guideline, provisions are valued using realistic expectations of future experience, with compulsory margins for prudence and deferral of profit emergence. Surplus allocated to policyholders under investment contracts liabilities with a discretionary participating feature but not yet distributed (i.e. bonus stabilisation reserves) is included in the carrying value of liabilities. Investment options and guarantees embedded in insurance contracts have been calculated on a market-consistent basis, with additional margins added as permitted by APN 110. The company performs liability adequacy testing on its liabilities under insurance contracts (including investment contracts with discretionary participating features) to ensure that the carrying amount of its liabilities is sufficient in view of estimated future cash flows. When performing the liability adequacy test, the company discounts all contractual cash flows and compares this amount to the carrying value of the liability at discounted rates appropriate to the business in question. Where a shortfall is identified, an additional provision is made. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the income statement as they occur. These are described in more detail in notes 40 and 41. Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recovery are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amount provided. The company applies shadow accounting in relation to certain insurance contract provisions where the measurement of the liability depends directly on the value of owner occupied property and the unrealised gains and losses on such property are recognised in other comprehensive income. Investment contracts (other than with discretionary participating feature) Liabilities under investment contracts without a discretionary participating feature, are classified as financial liabilities at fair value through profit or loss. For unit linked and market linked contracts, this is calculated as the account balance, which is the value of the units allocated to the policyholder, based on the value of the assets in the underlying fund (adjusted for tax). For other contracts, the fair value of the liability is determined by reference to the fair value of the underlying assets, and is in accordance with the FSV method, except that negative rand reserves arising from the capitalisation of future margins are not permitted. The fair value of the liability is subject to the deposit floor such that the liability established cannot be less than the amount repayable on demand. 17

19 Accounting policies 1.3 Insurance and investment contracts (continued) Unbundling The company has elected to unbundle the deposit components of products where the deposit components can be measured reliably. The deposit components are classified as financial liabilities at fair value through profit or loss. Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the sale of contracts. Acquisition costs in respect of insurance contracts and investment contracts with a discretionary participating feature are expensed as incurred. The FSV method, used to value these contracts, makes allowance in the valuation for the charges to policyholders in respect of such acquisition costs, therefore no explicit deferred acquisition cost asset is recognised in the statement of financial position for these contracts. Costs incurred in acquiring investment management service contracts Incremental costs that are directly attributable to securing an investment management service contract are recognised as an asset to the extent they can be identified separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs are amortised over periods of between 5 and 10 years. 1.4 Intangible assets Intangible assets, which represent developed software, are measured at cost on initial recognition. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised over their useful life of 3 years on a straight-line basis and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period, residual values and the amortisation method are reviewed at each reporting date. Changes in expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. An intangible asset arising from development expenditure on an individual project is recognised only when the company meets the following recognition criteria: demonstration of the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the development. The carrying value of capitalised development costs is reviewed for impairment annually when the asset is not available for use or more frequently when an indication of impairment arises during the reporting year. Subsequent expenditure on capitalised intangible assets is capitalised only when it meets the criteria listed above. Research costs are expensed as incurred. 1.5 Investment property Real estate held to earn rentals or for capital appreciation or both, is classified as investment property. It does not include owner-occupied property. Investment properties are stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved. External valuations are obtained on such a basis as to ensure that substantially all properties are valued externally once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and reporting date an internal valuation is performed and adjustments made to reflect any material changes in value. 18

20 Accounting policies 1.5 Investment property (continued) The valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash flows. Land holdings and residential flats are valued according to sales of comparable properties. Near vacant properties are valued at land value less the estimated cost of demolition. Property developments are valued in a similar manner to income generating assets except where information about future net income cannot be determined with sufficient confidence, in which case fair value will be estimated with reference to the value of the land and the cost of construction to date. Land is valued according to the existing zoning and town planning scheme at the date of valuation, with exceptions made by the valuer for reasonable potential of a successful rezoning. Surpluses and deficits arising from changes in fair value and rental income are reflected as investment income in the income statement. For properties reclassified during the year from property and equipment to investment property, any revaluation gain arising is initially recognised in the income statement to the extent of previously charged impairment losses. Any residual excess is taken to the revaluation reserve. Revaluation deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual deficit is accounted for in the income statement. Investment properties that are reclassified to owner-occupied property are revalued at the date of transfer, with any difference recognised in the income statement. 1.6 Property and equipment Owned assets Owner-occupied property is stated at revalued amounts, being fair value at the date of revaluation less subsequent accumulated depreciation and accumulated impairment losses. Equipment, principally computer equipment, motor vehicles, fixtures and furniture, are stated at cost less accumulated depreciation and accumulated impairment losses. Subsequent expenditure Subsequent expenditure is capitalised when it is measurable and will result in probable future economic benefits. Expenditure incurred to replace a separate component of an item of owner-occupied property or equipment is capitalised to the cost of the item and the component replaced is derecognised. All other expenditure is recognised in the income statement as an expense when incurred. Revaluation of owner-occupied property Owner-occupied property is stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved. External valuations are obtained on such a basis as to ensure that substantially all properties are externally valued once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and reporting date, a valuation is performed and adjustments made to reflect any material changes in value. When an individual owner-occupied property is revalued, any increase or decrease in its carrying amount (as a result of the revaluation) is taken to other comprehensive income and presented in a revaluation reserve in equity, except to the extent it represents an increase that reverses a revaluation decrease previously recognised in the income statement, or a decrease that exceeds the revaluation surplus, then recognised in income statement. Derecognition On derecognition of owner-occupied property or an item of equipment, any gain or loss on disposal, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement in the period of derecognition. In the case of owner-occupied property, any surplus in the revaluation reserve in respect of the individual property is transferred directly to retained earnings. 19

21 Accounting policies 1.6 Property and equipment (continued) 1.7 Tax Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of owner-occupied property and equipment. In the case of owner-occupied property, on revaluation any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the property concerned and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount for each property. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred net of any related deferred tax, from the revaluation reserve to retained earnings as the property is utilised. Land is not depreciated. Owner-occupied property is currently depreciated over a period of 50 years using the straight-line method. Equipment is currently depreciated over a period between 2 to 5 years using the straight-line method. Residual values, depreciation methods and useful lives are reassessed at each financial year-end. Income tax charge for the year comprises current and deferred tax. Included within the tax charge are charges relating to normal income tax, taxes payable on behalf of policyholders and capital gains tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive income or equity, in which case it is recognised in other comprehensive income or equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the reporting date. Deferred tax is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in other comprehensive income or equity. The effect on deferred tax of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to other comprehensive income or equity. Deferred tax is not recognised on temporary differences that arise from temporary differences associated with investments in subsidiaries, associates and joint ventures where the timing of the reversal of the temporary differences can be controlled by the company and it is probable that the temporary differences will not reverse in the foreseeable future. A deferred tax asset is recognised to the extent that it is probable that future taxable income will be available, against which the unutilised tax losses and deductible temporary differences can be used. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realised. 20

22 Accounting policies 1.8 Reinsurance contracts Reinsurance contracts comprise contracts with reinsurers under which the company is compensated for losses on one or more contracts which are classified as insurance contracts. Reinsurance on contracts that do not meet this classification are classified as financial assets. Reinsurance assets principally include the reinsurers' share of liabilities in respect of contracts with policyholders. Amounts recoverable under reinsurance contracts are recognised in a manner consistent with the reinsured risks and in accordance with the terms of the reinsurance contract. Reinsurance is presented in the statement of financial position on a gross basis. Reinsurance assets are assessed for impairment at each reporting date. An asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the company may not recover all amounts due, and that the event has a reliably measurable impact on the amounts that the company will receive from the reinsurer. Outward reinsurance premiums are recognised when due for payment. 1.9 Financial instruments Recognition and de-recognition of financial instruments Financial instruments comprise investments and securities, loans and advances, including amounts due by/to group companies, derivative instruments, cash and cash equivalents and investment contract liabilities, other than those with discretionary participating features and borrowed funds. Financial instruments are recognised when, and only when, the company becomes a party to the contractual provisions of the particular instrument. The company de-recognises a financial asset when and only when: The contractual rights to the cash flows arising from the financial asset have expired or been forfeited by the company; or It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or It transfers the financial asset, neither retaining nor transferring substantially all the risks and rewards of ownership of the asset, but no longer retains control of the asset. A financial liability is de-recognised when, and only when, the liability is extinguished, that is, when the obligation specified in the contract is discharged, cancelled or has expired. All purchases and sales of financial assets are recognised at trade date, which is the date that the company commits to purchase or sell the asset. Fair value measurement considerations The fair values of quoted financial assets are based on quoted prices. If the market for a financial asset is not active, the company establishes fair value using valuation techniques that refer as far as possible to observable market data. These include the use of recent arm's-length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models. To the extent that the fair values of unlisted equity instruments cannot be measured reliably, cost may be an appropriate estimate of fair value. Categories of financial instruments Financial instruments are categorised as financial assets and financial liabilities at fair value through profit or loss and financial assets and financial liabilities at amortised cost. An analysis of the company's statement of financial position, showing the categorisation of financial instruments is set out in note 4. 21

23 Accounting policies 1.9 Financial instruments (continued) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss comprise those financial assets where the company's business model is to manage the assets on a fair value basis in accordance with a documented risk management and/or investment strategy and those that the company has elected to designate as at fair value through profit or loss in order to eliminate or significantly reduce a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis. This measurement election is typically utilised in respect of financial assets held to support liabilities in respect of contracts with policyholders. Financial assets at fair value through profit or loss are initially recognised at fair value excluding transaction costs directly attributable to their acquisition which are recognised immediately in the income statement. After initial recognition, financial assets at fair value through profit or loss are measured at fair value with resulting fair value gain or loss adjustments being recognised directly in the income statement. All related fair value gains and losses are included in investment income. Interest earned whilst holding financial assets at fair value through profit or loss is included in investment income. Dividends received are included in investment income. Financial assets at amortised cost Financial assets at amortised cost are initially recognised at fair value. Subsequent to initial measurement, such assets are measured using the effective interest method less any impairment losses. Interest received is recognised as part of investment income. All financial assets at amortised cost are recognised when cash is advanced to borrowers. Derivative financial instruments Derivative instruments, including options, futures, forwards and swaps are used to economically hedge against market and currency movements in the values of assets and liabilities. Listed derivatives are stated at quoted prices. Unlisted derivative instruments are valued using standard market valuation techniques. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition, including cash and balances with banks but excluding cash and cash equivalent instruments held for investing purposes. It excludes cash balances held in policyholder investment portfolios. Cash balances include cash collateral held. Financial liabilities Financial liabilities (other than investment contracts) are initially recognised at fair value less directly attributable transaction costs. After initial recognition, financial liabilities are measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Interest income and expense Interest income and expense is recognised in the income statement using the effective interest method taking into account the expected timing and amount of cash flows. Interest income and expense includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest method. Dividend income Dividend income is recognised in full on the ex-dividend date as investment income. 22